Building A PE-Value Creation Team for the Future

Private equity value creation teams can drive successful engagement with their management team, but they present challenges as well. A new report from JM Search’s Andrew Henry examines the structure of value creation teams and sharing key drivers for increasing enterprise value and tightening the deal timeline.

September 14, 2023 – A growing number of private equity firms are adding value creation teams to their organization. But many are finding that designing the structure of these teams has its difficulties, says JM Search’s Andrew Henry in a new report. “With many variations present in the market, building a strategy that fits the fund size and investment thesis, and complements the investment team, requires thorough analysis and strategic vision,” he said.

As a retained executive search firm for private equity, JM Search works closely with these value creation teams to recruit top talent. The firm provides the insights and best practices shared by private equity value creation leaders who are focused on accelerating shareholder value within their portfolios.

Understanding the Origin

“In speaking with private equity leaders, the origin of value creation teams has been an organic evolution as opposed to a strategic initiative and is usually fueled by investors seeking to assist underperforming portfolio companies with meeting or exceeding target growth goals,” Mr. Henry said. “Over time, firms found success in utilizing operating expertise in their investment strategy. From increased enterprise value to decreased transaction timelines and differentiation in the pitching process, the need grew. The outcome – an increased focus on growing value creation teams.”

Designing the Structure

Across the private equity industry, the structure of value creation teams varies significantly, according to Mr. Henry. “From the presence of operating partners to former consultants, industry and functional experts, former portfolio company executives, etc. – the range of structure is broad,” he said. “Depending on the firm, the mandate for the value creation team, resources dedicated, and buy-in from the partnership are heavy drivers in the size and scale of the team. However, as value creation teams continue to gain stride in the private equity ecosystem, firms that design a scalable structure are set up for longer-term success.”

Related: Building the Best PE and VC Leadership Teams in 2023

In JM Search’s conversations with value creation leaders, there were four distinct profile types that appeared to be most sought after: The generalist, the specialist, the consultant, and the operator. In its report, JM Search offered a profile of each:

• The Generalist. These are individuals that support a select number of portfolio companies. Generalists offer dynamic expertise and have proven capable of driving value throughout the holding period. Often former consultants, CEOs, or other experienced executives, generalists can support their portfolio companies with a range of needs but lack depth in a specific function or sector.

• The Specialist. Adding a functional and/or industry specialist has emerged as a common key strategy. Often former CFOs, technology leaders, go-to-market experts, etc., specialists tend to work across a greater volume of portfolio companies with a narrower focus. Adding a specialist has proven highly beneficial within HR, finance, commercial, and IT – where middle market companies tend to need more assistance during a period of high-growth. Engagement with the management team is not as consistent as a generalist approach but offers significant value in select areas.

• The Consultant. Many private equity firms are adding former consultants to their value creation teams. While consultants have limited operator experience, they are trained to handle multiple projects across a range of companies. They also bring significant client management skills, which is critical for interacting with management teams.

Andrew Henry is a managing partner at JM Search and leads the firm’s healthcare and life sciences practice. He brings over 20 years of executive search experience working across a diverse array of sectors within the healthcare industry. Mr. Henry has built his career supporting clients ranging from private equity and growth equity firms and their portfolio companies to Fortune 100 companies – collaborating to build differentiated leadership teams which drive value creation for shareholders.

• The Operator. Tenured operators offer a unique perspective to the value creation team. With deep industry and/or functional knowledge, operators understand the management teams’ mindset and the day-to-day operations of businesses. At times, operators can get too much in the weeds but offer a valuable set of skills and strategic understanding.

“While all profiles offer distinct advantages and disadvantages, firms must make hiring decisions based on the needs of their fund, investment strategy, and value creation plan,” said Mr. Henry. “There is no right way to build – it is important to find a combination that fits your distinct needs. Having a combination of team members ensures that we are able to bring in the right resources to get results and build management team trust.”

Engaging Third-Party Resources

Building value creation teams has substantially impacted how firms are engaging third-party resources, like search firms, consultants, and various vendors, according to the JM Search report. Across the firms they spoke to, the value creation leaders have become focused on streamlining the processes associated with the identification, selection, and general usage of third-party resources.

Opportunities and Challenges in Private Equity Recruiting
Private equity firms are saying that talent is the most important factor in driving growth. While financial engineering, inorganic growth, and market expansion remain important tools in the private equity toolbox, talent continues to emerge as key to growing companies and achieving the investment thesis, according to a report from Bespoke Partners. Yet unlike strategic assets, intellectual property, or other resources that fuel growth, talent can be notoriously difficult to optimize. In fact, the biggest challenge for the PE sector is getting talent right, according to Nat Schiffer, managing partner at The Christopher Group. “PE firms often compete with other financial services firms, technology companies, start-ups, and other industries for the limited pool of qualified talent with the necessary skill-sets and experience for the PE industry,” he said. “The intense competition for top talent can make it challenging to attract and retain qualified candidates who may have multiple options.”

“PE firms require candidates with a specific blend of financial acumen, operational experience, and industry knowledge to drive value creation in their portfolio companies,” he said. “Finding candidates with the right mix of skills and expertise, particularly in specialized industries or niche markets, can be challenging, as these candidates may be in high demand and have limited availability.”

“From building out preferred vendor lists to creating a central relationship touchpoint and deepening partnerships, value creation teams are changing how third-party resources and private equity firms interact,” Mr. Henry said. “Generally, private equity firms are seeking to identify partners who align with their investment thesis. There has also been a growing desire for partnerships as opposed to more transactional and project-based third-party relationships.”

One client told JM Search: “We have preferred providers that are best-in-breed for our needs. It makes it easy to have candid conversations, lets us plug in the best firm for a specific project, and streamlines the overall engagement process.”

Measuring Success

“Success for value creation teams is defined by the success of the portfolio companies they serve,” Mr. Henry said. “Given the management team is the one executing, it can be a challenge to quantitatively measure the direct impact of value creation teams.” In JM Search’s conversations with PE firms, the following key measurements of success were shared: increase exit value and decreased hold time for portfolio companies served, satisfaction and feedback from management teams, and in some cases the implementation of a net promoter score (NPS).

“You have to be able to attribute value,” the JM Search report said. “You can apply objective measures and identify appropriate insight.  By keeping track of the tangible impacts such as cost savings, increased enterprise value, etc. you can better serve the portfolio companies and drive results.”

Looking ahead, as private equity firms continue to add value creation teams to their organization, building a structure that aligns with firm goals should be at the forefront of decision making,” Mr. Henry said. “The range of models present in the market is evidence that firms can strategically build value creation teams aligned to their needs that enable growth, value, and results.”

Related: How Talent is Driving Private Equity Success

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media

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